Chapter 29: Modelling 2 Flashcards Preview

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Flashcards in Chapter 29: Modelling 2 Deck (11)
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1
Q

Timescale/budget

A

Should not be overly complex, otherwise will take up too much time to build and run or be unnecessarily expensive

2
Q

Realism

A

• Valid
• Rigorous enough for purpose
• Reflect risk profile of business, with approp inputs
o Eg discount rate should reflect level of risk associated with the business
• Parameters reflect features of business (eg term)
• Allow for all cashflows to/ from business (incl bonuses) including interactions between assets and liabilities
• May need to be stochastic
• Should allow for effect of reserving requirements
stochastic

3
Q

Checking and documentation

A

• Outputs should be verifiable
• Model should be adequately documented (incl limitations and key assumptions)
• Parameters should show sensitivity of results to key factors of business
o Eg renewal rates and new business volumes

4
Q

Communication

A

Model should produce results that can be communicated to the management/ shareholders/ regulator

5
Q

Future use

A
  • Should be possible to reuse the model for similar purposes
  • The model should be capable of development and refinement – nothing complex can be successfully designed and built in a single attempt. Also regulatory reqs may change in the future
6
Q

Objectives

A

• Determined objectives as this will affect prices charged

o Higher price if key objective is profitability rather than gaining market share

7
Q

Understanding product features

A

• Claims fixed or real?
o If real, do they depend on price, earnings, medical or court inflation?
• Understand t&c’s of product
o Excesses/ exclusions
o Consider how soon will claim be paid and if there is likely to be lengthy claims control process
• Consider whether expected sales volumes are realistic given level of comp
• Consider whether any options will be offered
• Understand target market

8
Q

Gather data

A

• Needed to estimate claim freq/sev
• If new product, no data directily relating to product will exist
o Need to use other sources (TRAINER)
• Check data is correct and relevant, adjusting if necessary
o Eg if more stringent UW standards apply then a lower price may be appropriate
• Be aware of any limitation in data used (out of date/ obsolete)

9
Q

Analyse data

A
  • Split into major risk groups (eg gender/location)
  • Too few groups = data not suff. Homogeneous
  • Too many groups = number of data points in each will be too small to give credible results
  • Analyse data over suitable period
  • To estimate claim freq, number of incidents and exposed to risk need to be calculated
  • Judgement must be applied to results if quantity/quality of data is poor
10
Q

Assumptions for pricing

A

• Needed in order to build cashflow model
• Cost of benefits (claim freq/sev)
o Sev may depend on relevant inflation measure
• Margins
o Allow for expenses (potentially list)
o Suitable profit and contingency margins should be included
• Discount rate – depends on level of risk involved in product and company’s risk appetite
• Other factors
o Competitor reaction
o Reserving requirements/ cost of capital
o Taxation
o Reinsurance premiums

11
Q

Monitoring

A

Once the product has been launched it will be important to monitor experience (sales volume, claim rates, claim amounts) and adjust premiums accordingly.

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